RBI is likely to downgrade its FY14 (year ending March 2014) GDP growth forecast to 5% y-o-y from 5.5% and raise its WPI inflation forecast to 6.5% by March 2014 from 5%, says Nomura in its research note
With inflationary pressures resurging and FX volatility subsiding, Nomura expects a
25bp repo rate hike to 7.75% and a 25bp cut in the marginal standing facility rate (MSF) to 8.75%, according to a Nomura Fixed Income research note. It expects the MSF to leave the operative rate unchanged. If the RBI decides to make repo rate the operative rate immediately, then Nomura believes it would be accompanied by a 50bp repo rate hike. RBI has its monetary policy review meeting tomorrow (29 October 2013).
Nomura expects the RBI to downgrade its FY14 (year ending March 2014) GDP growth forecast to 5% year-on-year from 5.5% and raise its WPI inflation forecast to 6.5% by March 2014 from 5%.
The potential for a surprise at the RBI’s monetary policy meeting scheduled tomorrow (29 October) is high due to multiple policy levers: a 0, 25 or a 50bp hike in the repo rate, a 0, 25 or a 50bp cut in the marginal standing facility rate and changes to the borrowing cap under the liquidity adjustment facility or the term repo facility, which could determine whether the repo rate is made the operational rate, according to Nomura.
FY14 has started on a slow note, with growth at a dismal 4.4% y-o-y over the first quarter (Apr-Jun). Furthermore, private domestic demand remained sluggish in Q2 FY14, which suggests downside risks to the RBI's growth forecast. Nomura expects the RBI to sound cautiously optimistic on growth revival and therefore believe a reduction to below 5% is unlikely, as it expects good monsoons, better exports and an investment revival ahead.
Despite its increased focus on CPI (consumer price index) inflation, the RBI still officially, only projects WPI (wholesale price index) inflation. Since the September policy meeting, when the RBI set its WPI inflation projection at 5% by March 2014, the economy has been hit by a significant food (vegetable) price shock. Even if food inflation moderates, the pass-through of past currency depreciation suggests there are upside risks to WPI inflation. Therefore, Nomura expects the RBI to revise its March 2014 WPI inflation forecast up to 6.5% year-on-year from 5%.
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